A Rolling Stone Gathers No Loss

In this week’s Business Surgery, Conor Wilcock discusses the merits of ringing in the changes

As far as months go, March was pretty tumultuous. I recently upped the proverbial sticks, threw caution to the proverbial wind, and flew across the (not so) proverbial Atlantic Ocean to begin anew a life in the United States. Such an upheaval brings change thick and fast, whether you like it or not. I’ve had to swap my Ss for Zs, and my right-hand drive for my left-hand drive. I’ve even had to kick Elizabeth II from my wallet in anticipation of Messrs Lincoln, Hamilton and Jackson setting up stall (Queenie seems pretty disgruntled about it, even though I keep telling her it’s nothing personal).

All of this got me thinking about change in other arenas as well, namely business (after all, this blog isn’t called “personal surgery”). Why do companies feel the need to change? Is it healthy for companies to initiate change as standard? Are there occasions where change is ill-planned and can jeopardize future performance?

At this point, I did a little digging, and encountered an article by Stephen Hall, Dan Lovallo & Reiner Musters in the McKinsey Quarterly: “How To Put Your Money Where Your Strategy Is.”

Though the full article is available to subscription-readers only, the abstract captures the gist of the argument:

“Most companies allocate the same resources to the same business units year after year. That makes it difficult to realize strategic goals and undermines performance.”

In a nutshell, the article claims that a company which constantly evaluates the performance of business units, and allocates resources according to market opportunities, is likely to be worth more than a company which has a more stagnant strategy: one which allocates capital consistently every year.

“Worth more” to the tune of 40% over 15 years. 40%. Staggering stuff.

The article proceeds to make two interesting observations:

  • “Inertia reigns at most companies” – in fact, strategic planning often results in “modest resources shifts.” Put simply, companies aren’t backing their own strategies, preferring instead to leave institutional change by the wayside in favor of caution and stability.
  • Executives who reallocated less than their predecessors were more likely to be removed from their posts within five years. Watch out “static” CEOs: McKinsey is coming for you.

Upon first glance, I was waving my researcher arms in the air in celebration at this article. Of course change is good! Of course stagnation is bad! By habitualizing change, companies will ride on an inevitable path to profit and shareholder glory.

Or perhaps it’s not quite as straightforward as that.

To get to the bottom of this, we need to make a number of distinctions. Firstly, evaluation and change are two very different things. To change something for change’s sake can be damaging indeed. Has anyone bought a can of Coca Cola II recently? I didn’t think so. Regular (if not constant) evaluation on the other hand, is necessary and rewarding. Companies should replace the old adage with (the admittedly less memorable), “If it ain’t broke, evaluate it anyway.”

To extend on the point, there is a difference between positioning oneself for change and actually changing. Companies should never allow themselves to sink into the mire by assuming that resources are being allocated appropriately. The “plain sailing” approach renders companies susceptible to the iceberg of spiralling losses. And this is where research comes in. Research can help establish when and where change is necessary. The key here is that evaluation can lead to a “no” decision as well as a “yes” decision. Both have their place, both are valuable, and both can lead to reduced costs and increased margins.

That being said, let’s return to the article in question, which suggested a positive correlation between level of resource allocation and shareholder returns. Given how impactful change can be on future performance, companies need to commit to change and do it in the right way when past the point of no return. A second article published by the London Business School entitled “The New Change Equation,” warns of the perils of the Big Bang approach to change:

“Considerable time and effort is placed on announcing the forthcoming strategic agenda…yet life remains the same. The illusion of change substitutes any reality.”

Once you’ve got the green light, don’t be afraid to put your foot on the gas. If companies are smart enough, there’ll be another set of traffic lights a short distance ahead with another “go/no go” decision to be made. Let’s just hope you’ve remembered to drive on the correct side of the road…

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